RBA board has 'appetite' for rate hikes after staying on hold in December

The Reserve Bank of Australia left the cash rate unchanged at 3.6% in December in a unanimous decision after October CPI unexpectedly picked up to 3.8% (from 3.6% in September); the board judged some of the rise temporary but said risks to inflation have tilted to the upside. Governor Michele Bullock stressed the bank remains willing to raise rates if inflation proves persistent and will decide meeting‑by‑meeting (next meeting Feb 2–3), reiterating the aim of returning inflation to around 2.5%. Economists warn sticky housing, rents and structural utility/insurance pressures create a policy paradox—higher rates will cool demand but also impede housing supply—so persistent inflation could force tighter policy into 2026, adding downside risk to growth and ongoing market uncertainty.

Analysis

The Reserve Bank of Australia kept the cash rate unchanged at 3.6% in a unanimous December decision after headline CPI rose to 3.8% in October from 3.6% in September; Governor Michele Bullock said the board did not discuss rate cuts, remains prepared to raise rates if inflation proves persistent, and will decide meeting-by-meeting with the next meeting on Feb 2–3. The board judged some of the recent CPI increase reflects temporary factors but explicitly said risks to inflation have tilted to the upside, signalling a shift from a previously dovish tone to a more hawkish stance.

External commentary highlights key structural drivers keeping inflation elevated: high rents and constrained rental housing, gradual easing of construction costs due to labour and materials shortages, and utility/insurance pressures tied to structural/regulatory factors, creating a policy paradox where higher rates both depress demand and impede housing supply. Economists note the economy is running at or near capacity even as jobs soften and growth weakens, meaning persistent upside inflation could force tighter policy into 2026 and raise downside risk for growth-sensitive assets.

Given the RBA’s posture and the market’s moderately negative sentiment, investors should price a higher-for-longer rate path into allocations and focus on near-term data flow (monthly CPI, labour and housing metrics) as the primary trigger for repricing risk and duration exposure.

Key Decisions for Investors

• Reduce duration exposure in Australian fixed income and implement interest-rate hedges (futures or swaps) to protect portfolios from a higher-for-longer RBA stance
• Avoid adding to housing-exposed assets and consumer discretionary positions until CPI persistence, rental trends and construction supply dynamics are clearer
• Monitor monthly CPI, labour-market reports and RBA communications ahead of the Feb 2–3 meeting and be prepared to adjust positions on a meeting-by-meeting basis
• Increase allocation to inflation-linked securities, short-term bonds, or defensive equities to lower sensitivity to further monetary tightening